Rick is considering replacing its copying machine The new machine is expected to

Question

Rick is considering replacing its copying machine

The new machine is expected to increase revenue by 50,000 per year and operating expenses by 10,000 per year. The tax rate is 40 percent, and the cost of capital is 15 percent.

A. What is the initial investment for this project?

B. What is the incremental cash flow per year?

C. What is the difference in ending cash flow?

D. Should they replace the machine?

old new cost when new 30000 50000 age 5 years 0 depreciation method straight-line over 10 years to zero
straight-line over 10 years to zero salvage 5 years from today 0 25000 net working capital (t=0 only) returned at end of project 2000 5000 Market value today 18000 50000 remaining life 5 years 5 years

Explanation / Answer

(a)

Initial investment is the amount required to start a business or a project.It is also called initial investment outlay or simply initial outlay.initial outlay equals the amount needed for capital expenditure,such as machinery,tools,shipment and installation,plus any increase in working capital,minus any after tax cash flows from disposal of any old assets. sunk costs are ignored because they are irrelevant.

Initial Outlay= Capital expenditurene+increase in working capital-disposal inflows

= $10,000

(C)

Net present value is also called net present worth that is defined as the sum of the present values of incoming and outgoing cash floes in a period.

NPV

PV=FV/(1+r)n

(d)

Internal rate of return(IRR) is that rate of return at which the NPV from the above investments will become zero.It is that rate of interest that makes the sum of all cash flows zero, and is useful to compare one investment to another.

(B) Net cash flow during the month 1 Cash flow from operating activities 2 Cash flow from financing activities 3 Cash flow from investing activities NET CASH FLOW

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.